40 USH HAS LOST ABOUT 14PC IN VALUE Dollar surge hurting Uganda real estate sector Widesp≥ead impo≥tation of building mate≥ials has di≥ectly exposed the secto≥ to fluctuations in the dolla≥ By BERNARD BUSUULWA The EastAfrican T he dollar’s continuing rise against the Uganda shilling has led to concerns that the trend may undermine the growth of the country’s construction sector. The dollar rose by about 2.9 per cent against the shilling during the first two weeks of 2015, according to markets reports, amid significant dollar outflows from several emerging markets to the US. In less than a year, the shilling has lost roughly 14 per cent in value against the dollar — a pattern demonstrated by a new record low of Ush2,965 posted in the second week of January, compared with the previous record low of Ush2,920 registered in September 2011. Market analysts project the shil- ling will remain weak in the first quarter of 2015 on account of rising import needs pegged to ongoing infrastructure projects. “The sharp rise in the dollar will directly raise construction costs due to significant importation of building materials. This will discourage many developers from executing planned projects leading to a slowdown in building activity,” said Shakib Nsubuga, Lamudi Uganda country manager. Mr Nsubuga said construction companies need to find local substitutes for selected materials in order to minimise their exposure to dollar fluctuations. Owners of undeveloped land will also be compelled to sell due to high development costs, resulting in discounted prices and increased demand for such properties. Widespread importation of build- ing materials has directly exposed the real estate industry to fluctuations in the dollar, with many developers already facing increased prices for various items and higher overall project costs. Besides construction materials, support services such as architectural work and bill drafting services are also priced in US dollars, a factor that escalates the impact of dollar fluctuations for real estate developers. About 65 per cent of construc- tion materials are imported, industry sources said, while some key inputs such as cement, roofing sheets, bricks and sand are locally produced. Commonly imported building materials include floor tiles, usually sourced from Italy and China, chandelier lights, glass and toilet seats. “The sharp rise in the dollar will inevitably affect prices of imported building materials and small tenants are more likely to default or shift to cheaper premises offering lower rates due to existing oversupply of commercial space,” said Moses Lutalo, head of commercial and residential portfolios at Knight Frank Uganda. The EastAfrican BUSINESS JANUARY 31 - FEBRUARY 6, 2015 notable increases in construction costs are expected to slow down existing projects and delay commencement of new ones, leading to reduced growth across the real estate industry, observers say. However, revised industry growth forecasts were not available by press time. Industry analysts also anticipate increased relocation of tenants seeking cheaper commercial space in an attempt to minimise currency-related costs alongside increased appetite for shorter-term rental contracts of three to six months. Despite worries sparked by dol- lar appreciation, some economists project significant growth in construction activity within selected Kampala suburbs. Fred Muhumuza, a senior manager at KPMG Uganda, said the surge in the dollar may be temporary but it is already affecting other sectors outside real estate. Other affected sectors Dr Muhumuza cites some medi- cal insurance firms that have been forced to reduce the number of service providers because some hospitals have recently adjusted their drug prices due to the impact of the rising dollar on imported health products. Besides that, he argues that in- creased relocation of tenants from upmarket suburbs to those that offer lower rental charges is likely to depress demand in certain areas and trigger a boom in new target zones. Whereas construction companies SUPPORT SERVICES Apartments under construction in Bugolobi, Kampala. The cost of building Besides construction materials, support services such as architectural work and bill drafting services are also priced in US dollars, a factor that escalates the impact of dollar fluctuations for real estate developers. About 65 per cent of construction materials are imported, industry As a result, Mr Lutalo said, the trend of dropping occupancy rates in large office buildings will continue, while smaller ones will struggle to achieve the 50 per cent occupan- sources said, while some key inputs such as cement, roofing sheets, bricks and sand are locally produced. Commonly imported building materials include floor tiles, usually sourced from Italy and China, chandelier lights, glass and toilet seats. cy rates needed to finance annual mortgage payments. Though shortage of locally pro- duced high quality building materials is blamed for this dilemma, material imports has gone up because of the shilling weakening against the dollar. Picture: File are traditionally allowed to escalate contract prices by a maximum of five per cent to absorb unexpected changes in prices of affected items, local firms remain vulnerable to currency shocks. “Most of our building materials are still imported because of low local production capacity. For example, there is no local producer of high quality floor tiles,” said Fred Tumwesigye, a director at engineering firm Babcon Uganda Ltd. Mr Tumwesigye said most con- struction firms quote costs in Uganda shillings while price escalation clauses favour increases in market prices and not foreign exchange fluctuations. As a result, contractors will be forced to fore go some of their profit margins in order to absorb currency related costs. Despite ≥ising GDP, savings, investments ≥emain low in Rwanda By JOHN GAHAMANYI The EastAfrican THE RWANDA government faces the daunting task of putting the economy back on a sound footing despite a high GDP growth rate, as national savings look set to drop while the ratio of investments remain flat. Economic recovery appears to be on track, with a growth rate of 7.5 per cent in the JulySeptember 2014 period. This growth, according to central bank officials, reflects an improvement in the financing of the economy following a strong rise in credit to the private sector as well as improved disbursement of foreign aid. However, with low national savings, a sustained flat rate of investment plus the uncertainty of aid flows, there is concern about the sustainability of the country’s economic recovery in the long run. National savings are set to drop to 6.8 per cent of GDP as at the end of 2014, from 9.5 per cent of GDP, according to IMF forecasts, which is below the government’s target of 30 per cent for 2017-18. Investments have remained stagnant, at 25.5 per cent of GDP, since 2009 and the trend is projected to continue to 2018. Yet under the second five-year Economic and Poverty Reduction Strategy, Rwanda seeks to attain an average economic growth rate of 11.5 per cent between 2013 and 2018. But, based on the current trend of growth in savings, the government is unlikely to meet its targets. Keeping investments above savings, ac- cording to bankers, means that Rwanda has more investment opportunities than it can “Usually, savings must equal investments.” Sanjeev Anand, managing director, I&M Bank afford to undertake. “Usually, savings must equal investments,” said Sanjeev Anand, the managing director of I&M Bank. Therefore, raising national savings is criti- cal if the government is to diversify away from foreign aid and borrowing in order to finance infrastructure projects. The government is also yet to finalise deals with the International Development Agency (IDA) and the African Development Bank (AfDB) for the funding of some projects in the energy, transportation and water sectors for the 2014-19 period. Such investments are critical for spurring growth and creating employment. The government aims to generate about 200,000 jobs every year. In order to encourage savings, the govern- ment has rolled out savings and credit cooperatives (Saccos) at the village level and introduced a stock exchange, among other initiatives. Although some of these initiatives may have brought improvements, they have not yet delivered the financial “revolution” that the government promised. The current state of national savings puts Rwanda below par with other East African countries such as Kenya, Tanzania and Uganda where national savings are relatively higher. For instance, Kenya’s national savings are 11 per cent of GDP, Uganda’s 15.5 per cent and Tanzania’s 18.2 per cent. While 68 per cent or three million Rwan- dans save money, according to the 2012 Finscope survey, most of these savings are used to cater for living expenses in times of financial difficulty. Only five per cent invest their savings. The government plans to review its pen- sion law to attract contributions from the informal sector while laws on a collective investment scheme and investment trust are also in the pipeline.